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Solid market conditions likely to continue in major Japanese logistics leasing markets; Nearly half of expected new supply has already been leased

2013/01/23 Today CBRE released leasing market trends and forecasts for large multi-tenant logistics facilities in the Tokyo Metropolitan Area and the Kinki Region for the fourth quarter of 2012.

Noteworthy Trends

Decreasing vacancy rates will likely continue for the major leasing markets of logistics properties in Japan supported by solid demand from major occupiers. With healthy sales, Internet retailers are expected to accelerate new openings of logistics facilities, while demand from the apparel and fashion industry is also expected to continue to be solid.

An increase in logistics services will result from new convenience store openings. Rents will likely continue to be solid and an upward trend is also possible over the next one to three years.

A large quantity of new supply is expected in the Tokyo Metropolitan Area in 2013, but this is expected to have a limited impact on rents and vacancy as almost half of the available space has been pre-leased.\

The leasing market for logistics properties in the Tokyo Metropolitan Area witnessed a decrease in vacancy in the fourth quarter of 2012 reflecting the favorable leasing conditions. The average vacancy rate of large multi-tenant facilities (LMT) in the Tokyo Metropolitan Area was 3.7% at the end of December 2012, an improvement of 0.9 points quarter-on-quarter (q-o-q). In addition to steady absorption in existing facilities, the Tokyo Metropolitan Area saw one new LMT open in the fourth quarter with a favorable occupancy rate of about 75%. Of note was that the average vacancy rates of LMTs that were more than one year old dropped by 0.7 points to 2.5% at the end of December, the lowest vacancy rate for this type of facility a historical low since 2004. In the Kinki Region, the average vacancy rate of LMT was 1.5% at the end of December 2012, an improvement of 0.4 points from the end of September 2012, following a remarkable 6.9 point improvement in the third quarter of 2012. Full occupancy continued for LMTs that were more than one year old.

Looking forward, the Japanese economy is expected to see moderate growth from early 2013 following the bottom of the market, supported by stable personal consumption as well as the expected recovery of manufacturing activities. The leasing market for logistics properties is also expected to be buoyant. These positive factors are expected to support demand and solid market conditions will likely continue.

In addition to the positive signs that department stores and supermarkets are seeing improving sales, convenience stores will likely continue favorable sales growth. The five major convenience store operators have also planned a significant number of new store openings that are on track to record a historical high in the total number of outlets in FY 2013. The demand for logistics services stemming from these new store openings is expected to increase. Reflecting strong sales expansion, Internet retail operators are likely to be further strengthening their logistics networks and platforms by accelerating new logistics facilities openings. Demand from the apparel and fashion industry will likely continue to be solid. It is forecast that rents will continue to be solid and an upward trend is also expected over the next one to three years.

In 2013, a large quantity of new supply is expected in the Tokyo Metropolitan Area, particularly in the second half of the year. The net leasable area of LMTs scheduled to open in 2013 will likely be slightly more than double the average supply in the each of the preceding five years. Nevertheless, pre-leasing activities have progressed faster than expected, including several contracts for a significant amount of space, and it is believed that almost half of the available space in newly supplied facilities has been secured. Thus, any negative impact on rents and vacancy will likely be limited.

In 2014, new supply in the Tokyo Metropolitan Area will likely decrease to a level which is slightly less than the historical average. Taking into account the “wait-and-see” approach among developers in monitoring the progress of new development projects, it appears unlikely that large additions of supply will be seen. In turn, the market is expected to see an improving trend in vacancy rates and the tight supply will contribute to an upward trend in rents from 2014 onward.

For further market trend details and forecasts as well as detailed market data by area, please review the Japan Industrial and Logistics MarketView 2H 2012, which is scheduled for release on January 31.